Dear reader,

In this issue:

• Who pays your medical aid?
• How much tax relief will you get this year?
• Thanks for your input!

Who pays your medical aid?

The big news this week is the change in taxation of medical aid contributions.

Over the last few years we’ve relied on cap amounts to determine what portion of the employer’s contribution is taxed as a fringe benefit.

In 2009/2010, for example, the cap amount on employer contributions for employees younger than 65, was R625. So let’s imagine your employer contributed R1 000 to your medical aid; R625 of this was tax-free. The difference (i.e. R375) was taxed as a fringe benefit, in your hands.

From March 2010, however, the cap amounts no longer apply when calculating income tax fringe benefits, and in particular, the tax on the employer’s contribution.

The company’s contribution is now taxed in full.  The only guys who get relief from this are taxpayers who are older than 65 (or have been forced to retire early due to illness).

Employee contributions to medical aid will still be tax deductible, and subject to a cap amount to limit the benefit to the employee. For the 2011 tax year, the cap amounts are as follows:
•    R670 for the employee only (previously R625)
•    R1 340 for the employee and one dependent (previously R1 250).

How much tax relief will you get this year?

Let’s look at an example to see this in practice. Ted, aged 34, pays R800 to his medical aid (his employer pays in another R1 000). Ted has one dependent, which means the benefit cap is R1 340.

The employer contribution will be taxed in full as a fringe benefit. But, because his own contribution is tax deductible, Ted will get a R340 tax deduction.

So you may want to look at your salary structure, to see if your medical aid contributions and associated allowances are going to cost you more in taxes this year.

Thanks for your input!

Thanks for the votes in response to last week’s bulletin. I’ve tallied the numbers! The new title of the print newsletter, Simplify your Tax, will be Tax Watch. We’re busy with the makeover for the newsletter, and it looks fabulous: full of advice, insightful and interesting! I’m very excited about it!

And speaking of input, I thought I’d leave you with the poem that Peter (a subscriber) wrote for us:

The Latin philosophers they do say
"take Life the easy way"
keep out of the "Tax" mess
this causes only unnecessary stress

Use a professional guide they suggest
FSP - on the market is the best
for your friendly service I thank you without end
with "speed of sound" the latest tax guide you did send.

Good service is any business inner life
most of them started small, often as husband and wife
but they will grow and get into real money
as service is for a company what for a bread the Honey!
 

Until next week,

Fulvia Becatti
Managing Editor: Practical Tax Handbook and Practical Vat Handbook